Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

FDIC Rate Restrictions - Past and Future Impact?

Another headwind for deposit rates this year will be the FDIC rate caps. I haven't mentioned these caps in a while. Back in May 2009 the FDIC started to post weekly rate caps. The caps are designed to restrict interest rates for "less than well capitalized institutions". The intent is to reduce the deposits that unhealthy banks can take in and thus decrease potential losses for the FDIC if the bank fails.

As you might expect, these have gone down in the last year. Here are the rate caps last year on January 4, 2010:

Savings - 0.96%

Interest Checking - 0.88%

12-month CD - 1.66%

60-month CD - 2.89%

More Banks May Be Affected

In the FDIC's 2009 Third Quarter report, it listed the number of problem banks at 552. In its 2010 Third Quarter report, the number has increased to 860. The FDIC's list is secret, but you can get an idea of these banks based on public enforcement actions. That's what the Calculated Risk Blog maintains, and its current unofficial problem bank list now includes 935 banks which is up from 389 in August 2009.

With more problem banks, it's likely that more are being affected by the FDIC's rate caps.

Effects on Healthy Banks?

The FDIC's rate caps may indirectly influence rates that healthy banks pay. It's an easy benchmark for banks to use. This was described in this Jumbo CD Investments CD Rates blog post. In the post, it was mentioned that they "have heard of some pressure from bank examiners telling banks, healthy or not, that they shouldn’t be paying rates higher than the cap."

Effects on Reward Checking Accounts

In November 2009 I posted a letter that a bank sent to its customers describing how the FDIC's rules were forcing it to reduce the reward checking account rates. There have been many cases in the last year when reward checking rates have plummeted to below 1.00%. It appears that the FDIC continues to group reward checking with interest checking. So a less than well capitalized bank may be forced to lower its reward checking rate to be no higher than the interest checking rate cap (which is currently 0.85%). One possible example of this happened recently at NBRS Financial. In December the bank slashed its reward checking rate from 4.01% to 0.80%. The bank didn't specifically mention being forced to make these cuts by the FDIC. The bank is operating under a Federal Reserve Cease and Desist Order.

The company that powers most reward checking accounts, BancVue, has tried to change how the FDIC's views reward checking accounts. You can read about this in their letter to the FDIC.

Other Rate Restrictions

These published rate caps may not be the only rate restrictions being forced onto banks. In May 2009, the American Bankers Association was successful in getting the FDIC to issue restrictions on Ally's deposit rates. In November 2009, the Wall Street Journal described reports of how this rate restriction was being implemented:

The FDIC asked GMAC officials to keep the rates on deposits low enough so the bank wasn't one of the nation's top five rate payers, as measured by Bankrate.com, an interest-rate information service, people familiar with the matter say.

How does Ally Bank's CD rates currently rank at Bankrate.com? It's #6 for the 1-year CD, #8 for the 5-year CD (#5 to #7 have the same rate) and #9 for savings accounts (#2 to #8 have the same rate).

Issues to Consider

The main area where depositors can be affected by these rate caps is the reward checking account. The bank is free to lower rates, and as we've seen, the rate cuts can be harsh. So it does make sense to consider the health of the banks when you decide on new reward checking accounts. Our Bank Health Ratings page can be a useful resource. You can also use that page to review a list of banks with the worst Texas Ratios by asset size and by state. Another thing to consider is that credit unions are not subject to these rate caps. So that gives credit unions an advantage.

Interesting how Ally is not allowed to be in the Top 5. Of course there are many other ways how a bank can be in 6th place yet really have the 1st place offering. For example, a bank could decide to offer a vastly shorter early withdrawal penalty, say only 60 days. Or it could decide to be short of 5th place by reducing its rate by 0.01%.

Right now the stock market is controlling the interest rates through the Obama regime. They know that as long as the bank interest savings rates stay low, people will continue to invest in the stock market even though they are not happy with the past losses and past performance. The suggestion is if the stock market is doing well, then the economy will do well. Maybe so, but at what point does the government quit rigging the game? If bank savings interest rates start rising drastically, then you will see the stock market cry foul to the government and probably tank to prove their point.

It is going to be interesting to see how long the government can continue to hold down interest rates with little or no regard to the common folks.

And interestingly, the attempt to make it harder for weaker banks to attract money has not worked either. They just post a rate on the net or a listing service and take funds all day long. Then they fail and it costs the FDIC more than it should have.

The whole banking system was geared for debtors not savers.Bernanke decided to help wall street by pumping free money into the banks, who invested all of the money on wall street and didn't bother to help the borrowers.Now the banks got used to his game and like drug addicts want more free money by crying to get more and more.Like never ending nightmare, Bernanke continues to support wall street and QE2 is ready to be pumped into the banks again and again.This is done on purpose to punish the savers for not playing his game and here we are, fighting for few left over pennies that the bank are throwing and at same time laughing at us.QE2 will not help the economy at all, but will destroy the Dollar and our savings at same time. What is left to do now is stay put, cross the fingers and pray for miracle to happen.

I do hope you'll keep track of what happens with BancVue's efforts to persuade the FDIC that RCAs should not be treated the same as regular checking accounts for interest cap purposes. That approach is just silly. They at least should have, if nothing else, a separate cap category for RCAs (for banks that are in financial difficulty).

The banks, like Wall Street are making their money by betting on and buying derivatives. Just like the big banks betting that the foreclosures would go up and then wouldn't let people get into the new mtgs that the gov allowed. CEO's are paying fines, banks are getting sued and this will take years to go thru the system. Wall Street is not investing in companies, banks are not letting business borrow. They are betting with and on derivatives. That is where the money is. Why should they invest in the unknown when they can control the futures of oil, lumber, etc controlling it and then when the prices are high enough for them they sell make a fortune and try another commodity. We saw this with lumber in Jan and now with oil. When 25 guys can make 25 billion doing this and pay 15% income tax why would they do anything else. OH yes they are called small business because the definition of small business is define by having less than 100 owners. Small business is not defined by their income or profits. And yes these are the same people that just contributed 300 million to those now in office and sitting on the committees that will control their business. Until we get money out of government nothing will change. Those with the gold rule. That is the golden rule of today. Let this president, (the first one in a very long time) try do what he can to try to fix this MONSTROSITY. When you have so many with money trying to control the other 2 branches of government I am not sure how much the administration can do. When people stop reading opinion pieces and start reading articles with footnotes other than footnotes from opinion pieces we will be more informed. When the administration threatened that they were going to pass a regulation to make the betters take physical control of these commodities when they were betting. the hedge funds stopped but the banks took over. Now with the change in Congress you can bet they will be back to the same old thing. Greed has again taken over.

I know this is a tad off topic but my reward checking account has a calendar which shows the cycles. It has previously been a January thru December thing but this year one cannot go further than March. I have a hunch this may be a signal that the demise of their RCA is nigh. And alas, I just went to the trouble of having my SS check moved there.